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The Impact of Intergovernmental Grants on Cost Efficiency: Theory and Evidence from German Municipalities

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  • Kalb, Alexander
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    Abstract

    In this paper we use a simple bureaucracy model of fiscal illusion to analyze the impact of intergovernmental grants on the cost efficiency of local jurisdictions. We find that a higher degree of redistribution within a system of fiscal equalization or an increase in the amount of grants received by a local jurisdiction leads to an extension of organizational slack or X-inefficiency in that jurisdiction. This theoretical prediction is tested by conducting an empirical analysis using a broad panel of German municipalities. The results of the empirical analysis are consistent with the theoretical findings and therefore support the existence of a negative incentive effect of intergovernmental grants on local authorities' cost efficiency. --

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    Bibliographic Info

    Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 08-051.

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    Date of creation: 2008
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    Handle: RePEc:zbw:zewdip:7361

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    Related research

    Keywords: Cost efficiency; Fiscal equalisation; Intergovernmental grants; Bureaucracy; Stochastic frontier analysis; German municipalities;

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    1. Brian Knight, 2002. "Endogenous Federal Grants and Crowd-out of State Government Spending: Theory and Evidence from the Federal Highway Aid Program," American Economic Review, American Economic Association, vol. 92(1), pages 71-92, March.
    2. Battese, G E & Coelli, T J, 1995. "A Model for Technical Inefficiency Effects in a Stochastic Frontier Production Function for Panel Data," Empirical Economics, Springer, vol. 20(2), pages 325-32.
    3. Geys, Benny & Heinemann, Friedrich & Kalb, Alexander, 2007. "Local Governments in the Wake of Demographic Change: Efficiency and Economies of Scale in German Municipalities," ZEW Discussion Papers 07-036, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    4. Moesen, Wim & van Cauwenberge, Philippe, 2000. " The Status of the Budget Constraint, Federalism and the Relative Size of Government: A Bureaucracy Approach," Public Choice, Springer, vol. 104(3-4), pages 207-24, September.
    5. Geys, Benny & Heinemann, Friedrich & Kalb, Alexander, 2008. "Voter Involvement, Fiscal Autonomy and Public Sector Efficiency: Evidence from German Municipalities," ZEW Discussion Papers 08-024, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    6. Christos Kotsogiannis & Robert Schwager, 2006. "Fiscal Equalization and Yardstick Competition," CESifo Working Paper Series 1865, CESifo Group Munich.
    7. Geys, Benny, 2006. "Looking across borders: A test of spatial policy interdependence using local government efficiency ratings," Journal of Urban Economics, Elsevier, vol. 60(3), pages 443-462, November.
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    14. Pitt, Mark M. & Lee, Lung-Fei, 1981. "The measurement and sources of technical inefficiency in the Indonesian weaving industry," Journal of Development Economics, Elsevier, vol. 9(1), pages 43-64, August.
    15. Aigner, Dennis & Lovell, C. A. Knox & Schmidt, Peter, 1977. "Formulation and estimation of stochastic frontier production function models," Journal of Econometrics, Elsevier, vol. 6(1), pages 21-37, July.
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    17. Battese, George E. & Corra, Greg S., 1977. "Estimation Of A Production Frontier Model: With Application To The Pastoral Zone Of Eastern Australia," Australian Journal of Agricultural Economics, Australian Agricultural and Resource Economics Society, vol. 21(03), December.
    18. James R. Hines & Richard H. Thaler, 1995. "The Flypaper Effect," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 217-226, Fall.
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    Cited by:
    1. Peter Haug, 2009. "Shadow Budgets, Fiscal Illusion and Municipal Spending: The Case of Germany," IWH Discussion Papers 9, Halle Institute for Economic Research.
    2. Anna Montén & Christian Thater, 2010. "Determinants of efficiency in child care provision," Ifo Working Paper Series Ifo Working Paper Nr. 83, Ifo Institute for Economic Research at the University of Munich.

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